Short seller Jim Chanos warns regional banks and commercial real estate could be hit hard if lending dries up

• Jim Chanos warns regional banks and commercial real estate may run into trouble.
• The short seller cautions tighter credit could hit real estate companies, harming their lenders.

Jim Chanos has raised the alarm on smaller banks and commercial real estate, saying they could tumble in value if financing dries up and loan defaults rise.

"The regional banks have most of the exposure," the short seller and Chanos & Company boss said during a recent episode of the Business Breakdowns podcast.

"What happened in the last couple of weeks has really been much more about bond and fixed-mortgage portfolios than credit," he continued. "It really was banks that took on excess deposits and gambled in the bond market that sunk."

"I don't think we've seen the credit problems yet," he added.

Three US banks have folded in recent weeks, most notably Silicon Valley Bank. The California lender had an unusually large percentage of uninsured deposits, and invested in long-dated Treasuries that slumped in price as interest rates soared over the past year.

When SVB tried to shore up its finances by selling bonds and raising capital, its customers panicked and pulled their money out en masse. The wave of withdrawals overwhelmed the lender within days, spurring federal regulators to take control and guarantee its deposits.

Experts have cautioned the banking-sector turmoil could spook lenders into tightening their standards as a precaution against further bank runs. That would make it tougher for consumers and businesses to access financing.

The Federal Reserve has already raised interest rates from nearly zero to upwards of 4.75% over the past 12 months or so. The hikes have made borrowing more costly, weighed on asset prices, and increased the risk of a recession.

The darkening backdrop has stoked concerns about commercial real estate, as regional banks are the sector's key lenders. The industry could be hit hard if financing dries up, while banks could suffer if property prices tank and loan defaults rise.

"Commercial real estate was really an attractive asset on the way up," Chanos said. "It becomes in bad markets, poor credit markets, a really bad asset — and everybody forgets that."

Chanos is best known for his wager against Elon Musk's Tesla, and for helping to uncover Enron's accounting scandal. He advised investors in real estate and real estate investment trusts (REITs) to proceed cautiously, as headline figures don't tell the whole story.

"There are so many moving parts now that are below that surface that will impact valuations that you might not be aware of," he said.

Chanos pointed to companies flattering their financials by disguising operating costs as overhead, and capitalizing expenses over the duration of their leases.

It's worth noting that Chanos is betting against legacy data centers, and stands to profit from a slump in commercial real estate.